State Sec. Ins. Co. v. Frank B. Hall & Co.

• Decision Date: 08 February 1994
• Docket Number: Nos. 1-92-3236,1-92-3433,s. 1-92-3236
• Citation: 630 N.E.2d 940,258 Ill.App.3d 588,196 Ill.Dec. 775
• Parties: , 196 Ill.Dec. 775 STATE SECURITY INSURANCE COMPANY, an Illinois corporation, Plaintiff-Appellant/Cross-Appellee, v. FRANK B. HALL & COMPANY, a Delaware corporation and Frank B. Hall & Company of Texas, a Texas corporation, Defendants-Appellees/Cross-appellants.
• Court: United States Appellate Court of Illinois

Page 940

630 N.E.2d 940

258 Ill.App.3d 588, 196 Ill.Dec. 775

STATE SECURITY INSURANCE COMPANY, an Illinois corporation Plaintiff-Appellant/Cross-Appellee, v. FRANK B. HALL & COMPANY, a Delaware corporation and Frank B Hall & Company of Texas, a Texas corporation Defendants-Appellees/Cross-appellants.

Nos. 1-92-3236, 1-92-3433.

Appellate Court of Illinois First District, Second Division.

Feb. 8, 1994.

Leonard M. Ring & Associates, P.C., Chicago, for plaintiff/appellant and cross-appellee; Leonard M. Ring, Leslie J. Rosen, of counsel.

Winston & Strawn, Chicago, for defendants/appellees and cross-appellants; Terry M. Grimm, W. Gordon Dobie, of counsel.

Justice SCARIANO delivered the opinion of the court:

Plaintiff State Security Insurance Co. brought suit against insurance broker Frank B. Hall & Co. and its subsidiary Frank B. Hall & Co. of Texas alleging that they had committed fraud when they failed to disclose overcharges made to insureds on policies written by plaintiff, and that defendants should have remitted those monies to it as part of the premiums paid by policyholders to defendants. Plaintiff appeals from a jury verdict awarding it only $100 in compensatory damages and from the denial of its post-trial motion; defendants cross-appeal from the judgment entered against them, and from the denial of their post-trial motion.

In 1974, Steven Brody, then executive vice president of plaintiff, began negotiations with Mendel Kaliff, a Texas insurance broker and sole owner of Morris H. Kaliff & Son (Kaliff Agency), seeking to expand its business of insuring amusement enterprises. Negotiations between Kaliff and Brody culminated in a "Surplus Lines General Agency Agreement" (the Agreement) entered into on July 22, 1975, about one month after defendant Frank B. Hall & Co. of Texas acquired the Kaliff Agency. Brody and Kaliff, who had remained with the company as an officer after the acquisition, signed the Agreement on behalf of their principals. Under the Agreement, defendants would act as a broker of amusement risks for plaintiff.

In October 1977, plaintiff ended its relationship with defendants citing as its reason a high loss ratio on business defendants had submitted. At about the same time, plaintiff ceased insuring any amusement businesses, including those solicited by companies other than defendants.

In 1978, defendants realized that their records reflected large amounts of "service fee income" consisting of add-on charges made both to insureds and insurers, and that Kaliff's amusement park clients were among those overcharged. Defendants discharged Kaliff, notified the Texas Department of Insurance of their findings, and hired an accounting firm to assist in their inquiry regarding the service fee income. Because the ensuing investigation disclosed that a large portion of the overcharges were illegal under Texas law, it was determined that with regard to insureds for whom defendants had no rate-making authority, the insureds, rather than the insurers, were owed restitution on the overcharges. The Texas Department of Insurance administered the restitution program.

After plaintiff learned of defendants' restitution program--apparently through media coverage--it filed suit in the circuit court of Cook County seeking from defendants compensatory damages and $20 million in punitive damages. The case proceeded to trial on plaintiff's fifth amended complaint which contained two counts: fraud and "willful and wanton acts or omissions." Plaintiff claimed that defendants charged insureds more for premiums than had been quoted to plaintiff and retained the difference rather than remitting the entire premium to plaintiff.

Over defendants' objection, the trial court granted plaintiff's motion in limine to prevent defendants from presenting any evidence regarding its restitution program, the judge having rejected defendants' counsel's argument that the restitution program was relevant to the issues of defendants' intent and punitive damages. The court reasoned that the restitution program would be relevant to defendants' intent to defraud insureds, but not to its intent regarding plaintiff.

Kaliff's testimony was presented at trial through an evidence deposition in which he described the service fee income as add-on charges to cover the cost of doing business. He further testified that service fee income appeared on the company books which defendants had access to both before and after the sale of his agency, and that since defendants conducted regular audits of the books for his clients they would have been aware of the charges. Kaliff also stated that as to those risks for which defendants lacked rate-making authority, they charged the insured the agreed upon premium plus the service fee, and the insurer received the entire amount of premium it requested from defendants. Joel Kornreich, vice president in charge of corporate development for defendants, disputed that defendants were aware of the service fee income prior to their acquisition of the Kaliff Agency.

Brody testified that, as far as he knew, Kaliff did not misrepresent the nature of any risks nor did he ever fail to pay plaintiff. Richard Pepelea, plaintiff's vice president in charge of underwriting, calculated plaintiff's damages at $114,953 based on his review of defendants' files. Defendants objected that these files were not authenticated and that some of plaintiff's files were intermingled with defendants' files, but the court overruled the objection. Defendants refused to stipulate to the amount of overcharges because the court would not permit the stipulation to include the fact that policyholders were reimbursed therefor. On cross-examination, Pepelea conceded that plaintiff received all the money it had billed defendants on the amusement park accounts.

At the close of plaintiff's case, the court granted defendants' motion for a directed verdict as to the willful and wanton acts or omissions count, but denied it as to the fraud count; and when defendants renewed their motion for a directed verdict at the close of their case, the court again denied it. Over defendants' objection, the court instructed the jury that it had to find defendants liable for compensatory damages before it could award punitive damages.

The jury, in its answer to a special interrogatory, found that the "disputed amount of money" belonged to plaintiff rather than its policyholders. It awarded plaintiff $100 in compensatory damages and $250,000 in punitive damages. Plaintiff appeals from the denial of its post-trial motion seeking judgment n.o.v. on the compensatory damages portion of the verdict, and from the court's denial of pre-judgment interest on plaintiff's "proven" compensatory damages, or in the alternative, additur on plaintiff's "proven" compensatory damages and pre-judgment interest, or a new trial on the issue of compensatory damages only; defendants cross-appeal from the judgment entered against them.

A motion for a directed verdict or for a judgment n.o.v. should be granted only when all of the evidence viewed in a light most favorable to the opponent so overwhelmingly favors the movant that no other verdict could stand. (Pedrick v. Peoria & Eastern R.R. Co. (1967), 37 Ill.2d 494, 510, 229 N.E.2d 504, 513-14; see also Fitzpatrick v. ACF Properties Group, Inc. (1992), 231 Ill.App.3d 690, 709, 711-12, 172 Ill.Dec. 657, 670-72, 595 N.E.2d 1327, 1340-42, appeal denied (1992), 146 Ill.2d 626, 176 Ill.Dec. 797, 602 N.E.2d 451 (applying the standard set forth in Pedrick to an appeal of a directed verdict in a fraud action).)

Fraud in its general sense includes "any act, omission, or concealment calculated to deceive, including silence, if accompanied by deceptive conduct or suppression of material facts constituting an act of concealment." (Farm Credit Bank of St. Louis v. Isringhausen (1991), 210 Ill.App.3d 724, 727, 155 Ill.Dec. 235, 237, 569 N.E.2d 235, 237 (citing Rybak v. Provenzale (1989), 181 Ill.App.3d 884, 899, 130 Ill.Dec. 852, 862, 537 N.E.2d 1321, 1331).) Under Illinois law, a cause of action for fraud consists of five elements: (1) a false statement of material fact; (2) by one who knows or believes it to be false; (3) made with the intent to induce action by another in reliance on the statement; (4) action by the other in reliance on the truthfulness of the statement; and (5) injury to the other resulting from that reliance. (Soules v. General Motors Corp. (1980), 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601; Tan v. Boyke (1987), 156 Ill.App.3d 49, 54, 108 Ill.Dec. 229, 232, 508 N.E.2d 390, 393, appeal denied (1987), 116 Ill.2d 577, 113 Ill.Dec. 318, 515 N.E.2d 127.) The intentional omission or concealment of a material fact may be the basis of a fraud action if a special or fiduciary relationship exists which gives rise to the duty to speak. (Lidecker v. Kendall College (1990), 194 Ill.App.3d 309, 317, 141 Ill.Dec. 75, 80, 550 N.E.2d 1121, 1126.) A statement of a material fact is one upon which the plaintiff could reasonably rely in determining whether or not to act. Injury is measured by the harm the plaintiff suffered rather than by any benefit the defendant received. (Shah v. Chicago Title & Trust Co. (1983), 119 Ill.App.3d 658, 660, 75 Ill.Dec. 357, 360, 457 N.E.2d 147, 150.) Plaintiffs must prove fraud by clear and convincing evidence. (Lidecker, 194 Ill.App.3d [196 Ill.Dec. 779] at 314, 141 Ill.Dec. at 78, 550 N.E.2d at 1124.) Because we agree with defendants that plaintiff failed to show the element of injury, we limit our discussion to that issue.

We have consistently and emphatically held that plaintiffs' injuries in fraud actions must directly and proximately result from defendants' misrepresentations and cannot be assessed upon mere speculation or hypothetical assumptions. E.g., Spiegel v. Sharp Electronics Corp. (1984), 125 Ill.App.3d 897, 901-02, 81 Ill.Dec. 238, 242, 466 N.E.2d 1040, 1044;...